Employee Bonus Program: Importance and How to Launch One

How do you express gratitude to your employees?

Does it take the form of a year-end holiday party? Perhaps a gift card for a well-deserved coffee after a long week? Or maybe even an additional $1,000 for those who meet their quarterly goals?

All of these options fall under the umbrella of employee bonuses

Bonuses can vary in structure, including performance bonuses, signing bonuses, or holiday bonuses, and can be tailored to align with company goals and employee contributions.

To effectively manage and streamline your employee bonus program, consider utilizing compensation management software. These tools can assist you in tracking performance metrics, automating bonus calculations, and ensuring fair distribution, making it easier to reward your team for their hard work.

Whether they come in the form of cash, gifts, or experiences, bonuses can significantly demonstrate your appreciation and care for your team. However, creating an effective employee bonus program requires careful planning, and you may be wondering why it’s worth implementing in the first place.

If you've noticed decreased productivity, lower employee morale, or a lack of goal achievement, it may be time to provide additional incentives through an employee bonus.

Types of employee bonuses

There are many types of employee bonuses that your business can give to employees that go above and beyond.

Which category a bonus falls into depends on how you intend to reward your employees and the type of bonus you choose to give out.

Performance-based bonus

This type of bonus focuses on performance and encourages an employee, department, or entire company to achieve a specific goal. It is usually awarded for achievement over a certain length of time, like semi-annually.

Annual bonus

One of the most common types of bonuses is the annual bonus. It’s given annually based on an employee’s annual base salary. At most organizations, each employee is given a target bonus that reflects a possible bonus they could be given at the end of the year.

If the organization or manager decides that a certain employee has achieved their individual goals, the annual bonus will be awarded. The amount or percentage of this bonus usually varies depending on the department or role and will be determined by leadership or HR departments.

Signing bonus

A signing bonus sometimes called a sign-on bonus, is a one-time payment to an applicant viewed as highly desirable by a company’s recruiter. It’s essentially the cherry on top of a job offer or incentive to join an organization.

It’s important to remember that a signing bonus usually requires an employee to stay with the company for at least six months or a year.

Retention bonus

When an employee has stayed with the company for a long period of time, they may be given a retention bonus. This type of bonus is typically used to retain high-performing employees, especially when there is a hot job market, and to keep employees from jumping ship or being poached. It’s typically a one-time payment that companies prefer over a salary increase or a long-term raise.

Referral bonus

A referral bonus is an award given to an employee who helps recruit new talent to the organization by referring someone to fill a vacancy. These bonuses are usually paid after the person is hired and performs a successful job—typically staying with the company for up to six months.

The amount of this bonus depends on the type of role that was filled, how difficult the role was to fill, and if the individual was a diverse candidate.

Companies can make this easy by utilizing employee referral software to help HR personnel, hiring managers, and recruitment professionals oversee these programs. Tools within this category provide a platform for employees to refer friends, leverage their networks, and participate in company-wide hiring campaigns.

Spot bonus

Employees who achieve a major goal or milestone or demonstrate exceptional performance may qualify for a spot bonus. These can sometimes be referred to as straight-up discretionary bonuses. They’re usually three—or four-figure bonuses that center around performance and are spur-of-the-moment. Spot bonuses can also come in the form of gift cards or additional paid time off.

Sales commission

A sales commission is most commonly used among sales teams and is based on the amount of money or revenue a salesperson earns during a specific period of time. It complements the employee's base salary and is defined through a sales commission structure at the top of the year.

Holiday bonus

A holiday bonus is usually given during the winter holidays and is used by companies to end the year on a high note. Whether or not a holiday bonus is awarded to employees is usually based on the company's success or profit over the last 12 months. Holiday bonuses can be of any size and can often increase employee productivity, retention, and motivation to hit goals as the year ends.

Profit-sharing bonus

A profit-sharing bonus is when an organization awards employees a percentage of their profits. The amount of this bonus is based on the company’s actual earnings over a specific period of time. Of course, this type of bonus is only given to employees when a company sees a profit. The amount can be given in either stocks or cash and will depend on the employee’s salary and title.

Tenure bonus

A tenure bonus is a reward given to employees based on their length of service with a company. For example, a company might offer a $1,000 bonus after an employee reaches five years of service, $2,500 after ten years, and $5,000 after twenty years. This bonus recognizes the employee's loyalty and contribution over time and can be a one-time payment or an additional benefit tied to their anniversary.

Benefits of employee bonus programs

Now that you have a complete rundown of the types of employee bonuses your company can offer, you may be wondering why you should even consider inducing bonuses in the first place. Truthfully, there are a lot of benefits to rewarding your employees for all of their hard work – no matter the size of your company or the industry you work within.

One clear benefit of these programs is that they will motivate the team. When your employees have something to work towards, whether an individual goal or a company-wide goal, having a bonus at the end of the finish line will help incentivize them to finish it.

Your organization can also use this program as part of its recruitment marketing strategy to attract and acquire top talent. When a candidate is between you and another company, having these programs can be the deciding factor that makes them sign your offer letter over a different company.

If you notice your team is feeling bogged down or overworked, implementing a bonus program can improve morale and give your team the added drive they need at work. And lastly, a built-out bonus program can bring your team closer together. Usually, when your department is rewarded with a bonus, they all work as a team, make an effort, and crush their goals. This can establish teamwork and also build strong relationships.

How to create an employee bonus program

When creating an employee bonus program, ensure it meets your company’s business strategy and compensation principles. Also, be sure to assess the expectations and what you’re trying to achieve by creating a bonus plan. Using compensation management software to plan which employee bonuses you’ll award throughout the year is also in your best interest.

Whether you want to increase revenue or cross a specific milestone, follow these steps to create an employee bonus program.

Understand what drives employees

To get started, you need to understand what drives your employees. To do this, really consider what type of reward will be the most effective for producing the results you want for your company. While peer recognition may work for some, it's receiving a bonus for others.

Is a year-end or holiday bonus enough to encourage employees all year? Would spot bonuses be more beneficial? Do they value time off more than actual cash? If you aren’t sure, utilize survey software and ask for direct feedback! They’ll appreciate you taking the time to find out what truly matters and their bonus preferences.

Be straightforward about eligibility

There’s nothing worse for your employees than to think they’re eligible for a bonus, only for them to realize too late that they’re not.

Because of this, it’s important to be clear about who can be included in the program. Create challenging but still achievable goals. Make sure to specify that employees who directly and indirectly impact the goals may be included in the program and what that will look like.

You’ll also want to go into detail regarding eligible positions that can be included in the bonus, the length of time, and so on. For instance, you can say, “You must be a full-time content marketer who was hired before March 1, 2019.” Then, set a clear breakdown for measuring performance and achieving goals.

Effectively communicate requirements and expectations

Communication is essential regarding what your team can expect from the bonus program. Managers should expect regular meetings with their team to ensure that everyone is on the same page, especially when tracking and reviewing goals to be eligible for a bonus. Employees shouldn’t miss out on a bonus because they were unaware of their own progress or didn’t understand what was expected from their end. Clear objectives and communication are key on both sides.

Create clear documents regarding the program

One way to boost communication is to create comprehensive documents regarding bonus programs. This will also help limit the number of questions, emails, and direct messages sent to the HR department after announcing a new bonus program.

This documentation should serve as a reference point for employees, managers, and other HR professionals at the organization and should include everything employees need to both understand and attain their goals.

Get creative with alternatives to cash bonuses

Looking to show your gratitude and reward your team, but with a strict budget? A bonus doesn’t always have to be in the form of cash.

If your organization doesn’t have the funds for cash bonuses, consider these alternatives:

• A simple thank you or handwritten note
• A charitable donation
• Additional flexibility to their schedule
• Extra time off
• Onsite events or catered meals
• Achievement awards

How to pay an employee bonus

Paying a bonus can be complicated, and how you give out the bonus can make a difference.

If you’re paying a wage bonus or a raise, you can simply add the bonus pay to the employee’s wages. Just add the extra amount to the employee’s paycheck for the applicable pay period. You can also give a bonus check separate from regular wages.

It’s important to consider taxes when calculating and paying bonuses. If the plan is to payout with regular wages and the amount isn’t specified, you would withhold federal income tax on the total wages like normal.

However, if you give a separate check or combine bonus pay with the paycheck with the amount specified, there are a few ways you might withhold federal income tax. If you withheld income tax from the employee’s regular wages in the current or preceding calendar year, withhold a flat 22%. For example, if you give an employee a $400 bonus, you will withhold $88 for supplemental tax.

If you choose to pay supplemental wages at the same time as regular wages, you’d add the bonus wage to the regularly paid wage while then determining the income tax withholding on the combined wages. Then, subtract the already withheld tax while withholding the remaining tax from the bonus wage.

To put it simply, all bonuses are taxable and considered taxable income subject to employment and income taxes. It’s up to you, the employer, to correctly withhold, report, and remit the proper tax amounts, depending on your state.

Remember that bonus payments are also subject to withholding from Social Security tax, state income tax, local income tax, and Medicare tax. If you need more information, visit the Employer’s Tax Guide by the IRS.

Show me the money

No matter how you show appreciation to your employees, whether with cash or a holiday party, it’s sure to show them that their hard work and dedication to their role haven’t gone unnoticed. Even the smallest act can greatly affect your employees' morale and sentiment.

Check out the types of employee benefits you should be offering your staff.

This article was originally published in 2022. It has been updated with new information. robust